Impact Through Catalytic Finance

Florian Hoffmann and Vladimir Vladimirov

No 20861, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Impact investments that require industry-wide change often stall because firms wait for peers to move first, creating a coordination trap. We develop a theory showing a built-in conflict that aggravates this trap: insuring firms against cash-flow risk unlocks investment but exacerbates agency problems. To mitigate this tension, impact investors can target a critical mass of firms with tailored financing contracts, catalyzing competitive financing for others. Unlike uniform taxes or subsidies, optimal impact financing is firm-specific, and its cost critically depends on which firms investors target. Subsidized impact financing is best directed to smaller, less efficient, high-opportunity-cost firms, while the most promising firms are best left to conventional investors.

Keywords: Impact financing; catalytic capital (search for similar items in EconPapers)
JEL-codes: D21 D62 D86 G23 G32 Q56 (search for similar items in EconPapers)
Date: 2025-11
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